The Long Depression

April 3, 2013

Richard Eskow

Years ago I heard an old Irish politician tell a joke, in that brogue only old-time Irish politicians could pull off, about a prisoner who had his tonsils removed one December. The following December the prisoner had his adenoids taken out. A year later he was scheduled to have his appendix removed, but as they were wheeling him to the operation room the warden stopped him.

We seem to be losing our economy the same way the prison was losing its prisoner: one vital organ at a time. And will all due respect to old Irish politicians, this evisceration is no joking matter. An increasing number of economists think it will lead to long-term misery. So, apparently, do a lot of investors.

Economist Brad DeLong looked at the probable long-term effects of our current downturn and concluded that it will cause as much damage as the Great Depression here at home — and considerably more globally. DeLong says he then resolved to stop describing our current episode as the “Lesser Depression.” But that leaves us without a name.

I suggest we call it the “Long Depression.”

Why is it a “Depression”? As DeLong notes, the U.S. lost 180 percent of a year’s total output during the 1930s’ Great Depression. That depression came to an end when this country entered World War II. Barring a miracle (which nobody predicts), the current downturn won’t end nearly as quickly. And, as DeLong notes, “There is no moral equivalent of war on the horizon.”

DeLong estimates that total losses from the financial crisis of 2008 will come to 160 percent of a year’s output, making our current downturn roughly equal to the Great Depression. And that’s based on a national economy which is much larger than it was in 1929. DeLong estimates that total U.S. losses could be as much as 14 times larger than they were in the 1930s.

What’s more, the Great Depression hit the United States the hardest, while this depression is more severe in other parts of the world. DeLong notes that his “friends in the Obama administration … defend themselves … by pointing out that the rest of the world is doing far worse.” That has apparently become a reason for complacency, despite our grim conditions here at home.

Another reason for our political complacency lies in this depression’s protracted nature. The Long Depression isn’t hitting us all at once. Like the prisoner in the joke, it’s taking pieces out of us over the course of years. That’s allowed people to define previously unacceptable economic conditions as “The New Normal.”

In earlier times it would have been politically impossible to tolerate our current rates of unemployment, underemployment, poverty and wage stagnation. But wage stagnation arose over a period of decades, while the other statistics have gradually faded into background noise for our political and media elites.

Of course, DeLong could be wrong. But Paul Krugman seems to agree with him, and responded to his piece by laying out the contours of Europe’s depression. The markets agree with him too. As DeLong notes, yields on Treasury bonds strongly suggest that bond markets are pessimistic about the economy. So do the U.S. stock markets. And dollar exchange rates suggest that the global gloom is as profound as its domestic counterpart.

The pessimism is warranted:

The Long Depression is deep. The official unemployment rate is 7.7 percent, while the official U6 rate (which includes the under-employed) is 15.6 percent. An alternate methodology which includes long-term discouraged workers brings the figure up to 23 percent.

Nearly 50 million Americans lived below the poverty line as of the last census. And wealth inequality in the United States is higher than it is in Egypt.

The Long Depression is long. We’ve had abnormally high unemployment for four years now, and the numbers are still dismal.

Poverty in the United States increased for the fourth year in a row in 2011 (the last year for which statistics are available), and now includes one out of every five American children.

High earners have taken more than their share of the lopsided “recovery,” with the top 1 percent capturing 121 percent of the post-crisis income increases while the rest of the country fell behind. The minimum wage would need to be between $.9.22 and $10.25 an hour to keep pace with inflation, but the president’s very modest proposal (which would raise it to $9.00 by 2015, when the gap will be even greater) faces an uphill battle.

This growing inequality stifles growth and points to long-term stagnation in both wages and hiring.

And yet, as DS Wright reminds us (as if reminders were necessary),the topic du jour in Washington is deficits. That’s prolonging the Long Depression. Jobs programs have been declared “politically impossible,” despite the widespread public support seen in most polling data. Less aid is available for the growing ranks of the impoverished.

The sequester will make the situation even worse, with Head Start among the programs facing severe cuts. And tax programs which favor the wealthy and corporations, widening the inequality gap even further, are the topic of compromise rather than challenge.

Our grim economic fundamentals haven’t stopped the stock market from reaching record highs, as speculators and Fed-driven bubbles cash in on the short-term opportunities created by a two-tiered economy. Wall Street and Main Street don’t “rise and fall together,” presidential assertions notwithstanding.

Events of the last four years suggest that we’ve learned nothing from experience. As DeLong says, political leaders at home and abroad are summoning “the same ritual incantations … that were made by the Herbert Hoovers and Andrew Mellons and Ramsay McDonalds” of earlier generations.

They’re taking our economy apart, one piece at a time. Unlike the prisoner in that joke, we have a way out: through concerted action. But there’s no World War-sized event looming that could summon our will — or our willingness to accept government spending. There’s no sign of a new “Greatest Generation,” either.